iStudent:IIIJ Instructor: Timmothy Posey Assignment: Week 7 Homework )nste: t2/Nll4 Course: FINC400 D002 Fall 14 iTi-"r 9:24PM Book Keown/IMartin/Petty,Foundations ofFinance, Se l. (Break-even point and selling price) Parks Castings Inc. will manufacture and sell 180,000 units next year. Fixed costs will total $350,000, and variable costs will be 40 percent of sales. a. The firm wants to achieve a level of earnings before interest and taxes of $260,000. What selling price per unit is necessary to achieve this result? b. Set up an analytical income statement to veriff your solution to part (a)' a. What selling price per unit is necessary to achieve a level of earnings before interest and taxes of $260,000? $[ 6o""d to three decimal Places.) b. Set up the following analytical income statement to veriff your solution to part (a). (Round up all items to the nearest dollar.) Sales Less: Variable costs (40% of sales) Revenues before fixed costs Less: Fixed costs EBIT _. tt [email protected] Page I ,student: l-> fnstructor: Timmothy Posey Assignment: Week 7 Homework :Date: 12/29/14 Course: FINC400 D002 Fall 14 'Time: 9:24PM Book: Keown/fulartin/Petty, Foundations fFinance,8e 2. (Break-even point and operating leverage) Footwear Inc. manufactures a complete line of men's and women's dress shoes for independent merchants. The average selling price of its finished product is $85 per pair. The variable cost for this same pair of shoes is $50. Footwear Inc. incurs fixed costs of $160,000 per year. a. What is the break-even point in pairs of shoes for the company? b. What is the dollar sales volume the firm must achieve to reach the break-even point? c. What would be the firm's profit or loss at the following units of production sold: 7,000 pairs of shoes? 11,000 pairs of shoes? 15,000 pairs of shoes? a. What is the break-even point in pairs of shoes for the company? I units (Round to the nearest whole number.) b. What is the dollar sales volume the firm must achieve to reach the break-even point? $[ 6o""d to the nearest cent.) c. What would be the firm's profit or loss before interest and taxes (EBIT) at 7,000 pairs of shoes sold? Enter a positive number for a profit and a negative number for a loss. $[ 1no""d to the nearest dollar.) What would be the firrn's profit or loss before interest and taxes (EBIT) at 11,000 pairs of shoes sold? Enter a positive number for a profit and a negative number for a loss. $[ 6ound to the nearest dollar.) What would be the firm's profit or loss before interest and taxes (EBIT) at 15,000 pairs of shoes sold? Enter a positive number for a profit and a negative number for a loss. $[ lnound to the nearest dollar.) Page2 'student: fD fnstructor: Timmothy Posey Assignment: Week 7 Homework .Date: 12129/14 Course: FINC400 D002 Fall 14 'Time: 9:24PM Book: Keown/Tv{artin/Petfy, Foundations i ofFinance,8e 3. (Operating leverage) Rocky Mount Metals Company manufactures an assorfinent of wood burni ...

1. iStudent:IIIJ Instructor: Timmothy Posey Assignment: Week 7
Homework
)nste: t2/Nll4 Course: FINC400 D002 Fall 14
iTi-"r 9:24PM Book Keown/IMartin/Petty,Foundations
ofFinance, Se
l. (Break-even point and selling price) Parks Castings Inc. will
manufacture and sell 180,000 units
next year. Fixed costs will total $350,000, and variable costs
will be 40 percent of sales.
a. The firm wants to achieve a level of earnings before interest
and taxes of $260,000. What
selling price per unit is necessary to achieve this result?
b. Set up an analytical income statement to veriff your solution
to part (a)'
a. What selling price per unit is necessary to achieve a level of
earnings before interest and taxes
of $260,000?
$[ 6o""d to three decimal Places.)
b. Set up the following analytical income statement to veriff
your solution to part (a). (Round up
all items to the nearest dollar.)
Sales

2. Less: Variable costs (40% of sales)
Revenues before fixed costs
Less: Fixed costs
EBIT
_.
tt
[email protected]
Page I
,student: l-> fnstructor: Timmothy Posey Assignment: Week 7
Homework
:Date: 12/29/14 Course: FINC400 D002 Fall 14
'Time: 9:24PM Book: Keown/fulartin/Petty, Foundations
fFinance,8e
2. (Break-even point and operating leverage) Footwear Inc.
manufactures a complete line of men's
and women's dress shoes for independent merchants. The
average selling price of its finished
product is $85 per pair. The variable cost for this same pair of
shoes is $50. Footwear Inc. incurs
fixed costs of $160,000 per year.
a. What is the break-even point in pairs of shoes for the
company?
b. What is the dollar sales volume the firm must achieve to
reach the break-even point?
c. What would be the firm's profit or loss at the following units

3. of production sold: 7,000 pairs of
shoes? 11,000 pairs of shoes? 15,000 pairs of shoes?
a. What is the break-even point in pairs of shoes for the
company?
I units (Round to the nearest whole number.)
b. What is the dollar sales volume the firm must achieve to
reach the break-even point?
$[ 6o""d to the nearest cent.)
c. What would be the firm's profit or loss before interest and
taxes (EBIT) at 7,000 pairs of shoes
sold? Enter a positive number for a profit and a negative
number for a loss.
$[ 1no""d to the nearest dollar.)
What would be the firrn's profit or loss before interest and taxes
(EBIT) at 11,000 pairs of shoes
sold? Enter a positive number for a profit and a negative
number for a loss.
$[ 6ound to the nearest dollar.)
What would be the firm's profit or loss before interest and taxes
(EBIT) at 15,000 pairs of shoes
sold? Enter a positive number for a profit and a negative
number for a loss.
$[ lnound to the nearest dollar.)
Page2

4. 'student: fD fnstructor: Timmothy Posey Assignment: Week 7
Homework
.Date: 12129/14 Course: FINC400 D002 Fall 14
'Time: 9:24PM Book: Keown/Tv{artin/Petfy, Foundations
i ofFinance,8e
3. (Operating leverage) Rocky Mount Metals Company
manufactures an assorfinent of wood
burning stoves. The average selling price for the various units is
$600. The associated variable
cost is $350 per unit. Fixed costs for the firm average $ 170,000
annually.
a. What is the break-even point in units for the company?
b. What is the dollar sales volume the firm must achieve to
reach the break-even point?
c. What is the degree of operating leverage for a production and
sales level of 6,000 units for the
firm? (Calculate to three decimal places.)
d. What will be the projected effect on earnings before interest
and taxes if the firm's sales level
should increase by 45 percent from the volume noted in part
(c)?
a. What is the break-even point in units for the company?
I units (Round to the nearest whole number.)
b. What is the dollar sales volume the firm must achieve to
reach the break-even point?
$[ lnound to the nearest cent.)
c. What is the degree of operating leverage for a production and

5. sales level of 6,000 units for the
firm? Note that you can compare sales at a IDYI higher level
(6,600 units) in detemining the
degree of operating leverage.
I lnounA to three decimal places.)
d. What will be the projected percentage change in earnings
before interest and taxes if the firm's
sales level should increase by 45 percent from the volume noted
in part (c)?
[X 6o"nd to fwo decimal places.)
Page 3
StudentS
Date: 12/29/14
Time: 9:24 PM
fnstructor: Timmothy Posey Assignment: Week 7 Homework
Course: FINC400 D002 Fall 14
Book: Keown/Martin/Petfy, Foundations
ofFinance,8e
4. (Residual dividend policy) FarmCo, Inc. follows a policy of
paying out cash dividends equal to the
residual amount that remains after funding 70 percent of its
planned capital expenditures. The firm
tries to maintain a 30 percent debt and 70 percent equity capital
structure and does not plan on
issuing more stock in the coming year. FarmCo's CFO has
estimated that the firm will earn $14

6. million in the current year.
a. If the frm maintains its target financing mix and does not
issue any equity next year, what is the
most it could spend on capital expenditures next year given its
earnings estimate?
b. If FarmCo's capital budget for next year is $10 million, how
much will the frm pay in
dividends and what is the resulting dividend payout percentage?
a. If the firm maintains its target financing mix and does not
issue any equity next year, what is the
most it could spend on capital expenditures next year given its
earnings estimate?
$! milion (Round to two decimal places.)
b. If FarmCo's capital budget for next year is $ l0 million, how
much will the firm pay in
dividends?
$[ miilion (Round to one decimal place.)
What is the resulting dividend payout percentage?
[Z 6o"nd to two decimal places.)
5. (Constant dollar dividend payout policy) Parker Prints is in
negotiation with two of its largest
customers to increase the firm's sales dramatically. The increase
will require that Parker expand its
production facilities at a cost of $35 million. Parker expects to
pay out $7 million in dividends to
its shareholders next year. Parker maintains a 30 percent debt
ratio in its capital structure.

7. a. If Parker earns $20 million next year, how much common
stock will the firm need to sell in
order to maintain its target capital structure?
b. If Parker wants to avoid selling any new stock, how much can
the firm spend on new capital
expenditures?
a. If Parker earns S20 million next year, how much common
stock will the firm need to sell in
order to maintain its target capital structure?
$[ miilion (Round to two decimal places.)
b. If Parker wants to avoid selling any new stock, how much can
the firm spend on new capital
expenditures?
$[ million (Round to two decimal places.)
Page 4
Student:D
D*e:12129/14
Time: 9:24 PM
Instructor: Timmothy Posey Assignment: Week 7 Homework
Course: FINC400 D002 Fall 14
Book: Keown/Nlartin/Petty, Foundations
ofFinance,8e
6. (Stock dividends) In the spring of 2014 the CFO of Placebo
Pharmaceuticals, Inc. took a proposal
to the firm's board of directors to distribute a noncash dividend
to the firm's shareholders in the

8. form of new shares of common stock. Specifically, the CFO
proposed that the company pay 0.03
shares of stock to the holders of each share of common stock
such that the holder of 1,000 shares of
stock would receive an additional 30 shares of common stock.
a. IfPlacebohadtotalnetincomefortheyearof $11,000,000
and22,000,000 sharesof common
stock outstanding before the stock dividend, what are the firm's
earnings per share?
b. After paying the stock dividend, what are the firm's earnings
per share?
c. If you owned 1,000 shares of stock before the stock dividend,
how many dollars of earnings did
the firm e€un on your 1,000 share inveshnent? After the stock
dividend is paid, how many dollars
of earnings did the firm earn on your larger share holdings?
What effect would you expect from
the payment of the stock dividend on your total inveshnent in
the firm?
a. Before the stock dividend, what are the firm's earnings per
share?
$[ 1no.t"d to four decimal places.)
b. After paying the stock dividend, what are the firm's earnings
per share?
$[ ino,rnd to four decimal places.)
c. Which of the following statements regarding the effect of
stock dividend on your $1,000
investment in the firm is true? (Select the best choice below.)
r -:A. The dollars of earnings the firm eilrns on your 1,000

9. share investment are $500 before the
stock dividend and are $485 after, indicating that you will be
worse off from a stock
dividend.
r-rB. The dollars of earnings the firm earns on your 1,000 share
investment are $485 before the
stock dividend and are $485 after, indicating that the gain from
a stock dividend is truly
an illusion.
r
-. C. The dollars of earnings the firm earns on your 1,000 share
invesknent are $485 before the
stock dividend and are $500 after, indicating that you will be
better off from a stock
dividend.
i
-
i D. The dollars of earnings the firm earns on your 1,000 share
investment are $500 before the
stock dividend and are $500 after, indicating that the gain from
a stock dividend is truly
an illusion.
Page 5
snd"l!;p;
Time: 9:24 PM
Instructor: Timmothy Posey Assignment: Week 7 Homework

10. Course: FINC400 D002 Fall 14
Book: Keown/I,IartinlPetty, Foundations
ofFinance,8e
7. (Repurchase of stock) The Dunn Corporation is planning to
pay dividends of $500,000. There are
250,000 shares outstanding, and earnings per share are 54. The
stock should sell for $51 after the
ex-dividend date. If, instead of paying a dividend, the firm
decides to repurchase stock,
a. What should be the repurchase price?
b. How many shares should be repurchased?
c. What if the repurchase price is set below or above your
suggested price in part (a)?
d. If you own 100 shares, would you prefer that the company
pay the dividend or repurchase
stock?
a. What should be the repurchase price?
$[ 6ound to the nearest dollar.)
b. How many shares should be repurchased?
I shares (Round to the nearest whole number.)
c. What if the repurchase price is set below or above your
suggested price in part a?
"The capital gains to be received by the stockholders would not
be equal to the intended dividend,
ttrus resulting in a dollar benefit or loss to the stockholders."
Is the above statement true or false? False (Select from the
drop-down menu)

11. True
d. If you own 100 shares, would you prefer that the company
pay the dividend or repurchase
stock?
"IJnless you have a need for current income, you would
probably prefer the stock repurchase plan."
Is the above statement true or false? True (Select from the drop-
down menu)
False
Page 6